Slowdown may be more challenging than 1998 crisis

THE looming global economic downturn may be more challenging for Malaysia than the economic crisis it faced in 1998.

Datuk Mohamed Azman Yahya said in the current crisis, the Malaysian economy faces the risk of stagflation where growth slows down amid a high-cost environment.

"From an economist's standpoint this is probably one of the worst positions to be in. More worrying is that this is today a global phenomenon. From a policy response this is tricky - too much stimulus either fiscal or monetary may lead to inflationary pressures, too little may lead to a recession," Azman who is a member of the recently set up Economic Council said.

Malaysia is also facing challenges in general competitiveness, especially because of its long over-dependence on cheap foreign labour.

"This is very dangerous because there will always be some country somewhere that will be cheaper, and once these countries sort out their legal and infrastructure issues, they will be more competitive. We have to be more forceful in changing the drivers to our economy," Azman said.

He said Malaysia must adopt a measured approach to increase wages and productivity while keeping a watch on inflation.

He also observed a generally pessimistic sentiment and low consumer confidence and said that widespread belt tightening measures will affect the velocity of money and the domestic economy.

In the current weakened global economy Azman believes that the export-based manufacturing and commodity sectors will be most affected, as global demands contract.

"This in turn may affect the SMEs that rely on these sectors. At the same time, the property sector, which normally does well when wealth is created (either through earnings or stock market) and was, over the last few years fuelled by foreign buying, will also be affected," he added.

Likewise, consumption of non-necessities such as motor vehicles and some retail goods may also be adversely affected.

Azman said Malaysia would not need agencies such as Danaharta or Danamodal to weather the current crisis.

"The Malaysian banks are well capitalised and the risk management framework has improved significantly since the 1990s. The risk of large-scale corporate sector failure is also remote," he said.

Nevertheless, he said, it may be useful to keep an eye on the SMEs, especially on their financing needs where banks may need to be prepared to offer financial assistance to meet possible cashflow issues.

"Should there be an increasing case of abandoned housing projects, perhaps an SPV (special purpose vehicle) to take over and rehabilitate these in the interest of the public may be required. But beyond these, I will be very surprised if we need to revive any of the vehicles that were required during the 1998 crisis," Azman said.